12 Nov 14 Mistakes New Real Estate Investors Make: Part Two
Last week, we started on mistake #1 of the fourteen mistakes new real estate investors make: Starting later rather than sooner in investing in real estate. Today, we’re going to talk about the second and third. If you missed last week’s, make sure you check it out here.
Mistake #2: Not Focusing Your Energy On What Will Make You Money.
One way I see this lack of focus is when investors don’t look at enough properties. The only way you find really good deals and bargains is by looking at a lot of properties. Back in my heyday, I used to always look at 100 properties. I would then narrow it down to three to really focus on. And then I would make an offer on one or two.
One of the best ways to narrow that down is to look at properties that will get a good return from the rent. For example, I like to see a single-family house cash flow $300 a month after principle, interest, taxes and insurance. Spend your time and focus your energy on looking at properties. Then, focus your energy on crunching the numbers and finding a good cash flow that will allow your property to produce income for you.
You should also learn to write contracts. Don’t be guilty of paralysis by analysis, where you look at so many properties but don’t move. You get overwhelmed and then get stopped dead in your tracks because you can’t pull the trigger to move forward and execute. Learn to write contracts and then? Write contracts.
In order to focus your energy on what will make you money, you need to know what you’re doing when you look at properties and look at a ton, have a good formula and crunch the numbers, and learn to write contracts.
Mistake #3: Running out of cash.
It’s easy to run out of cash if you don’t maintain untouchable money. There should always be money you have set aside. When you’re borrowing from banks, they like to see you have 6 months of payments set aside. So, for example, if you have three properties and their payments are $1000 each, then that’s $18,000 in the bank. That’s important to have, but you also need to have untouchable money.
When I was investing aggressively, I would keep the 6 months of payments as well as other money that I set aside to be untouchable. This cash would allow me to take really great opportunities whenever they came along. I was always in the position to be able to jump on a chance to really grow my real estate investments.
You also need to check your credit score every month. If you’re an aggressive investor, especially, remember to check it. In the current mortgage environment, you can purchase primarily only four properties with a regular mortgage on them. That’s why it’s important to learn how to find other sources of money. Make sure that mortgage money is not the only money you’re finding.
Here’s what you can do. First, learn how to work with small banks, because the big chain banks won’t deal with you like this. Find small banks that will do portfolio loans for you and provide money to you out of their own portfolio. This means that they’re not going to sell that paper outside, back to Fannie or Freddie. They’re going to keep it internally. That will actually allow you to get past the four homes that mortgage rules limit you to. And they want to loan to people who have a good credit score. So make sure you’re checking your credit score and keeping it strong.
Lastly, make sure you refinance most of the time before you need cash. If there’s a cash situation where you’re trying to maintain the six months and untouchable money, and you have a property that will still maintain its cash flow after you refi, then pull that cash out and put it aside waiting for more opportunities. That’s how you grow.
I hope you enjoyed this video and I’ll see you next week for Mistakes #4 and #5!
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